Banksters

Honestly, even the Economist is on our side now. The end times truly are upon us.

Filed under: Economics

Libor: What is Wrong and What is Meh

As far is my understanding, there were two periods of Libor fixing at Barclay and elsewhere;  one prior to 2008 which involved manipulating Libor to boost trading profits indirectly and a second after 2008 where they manipulated Libor to prevent themselves going under.

First of all, disclaimer for Barclays, “they” were all at it, Barclays were just the most thorough in their investigations and the quickest in settling with various regulators. Bob Diamond’s ire is somewhat justified for that.

What Bob Diamond is not justified in doing is conflating the two sorts of Libor fixes in which banks were involved. Briefly, Libor is the London interbank offered rate, this is the average rate at which banks think they will be able to borrow large amounts of money from each other. An individual bank reporting a high Libor individually will raise doubts about its solvency. Trillions of pounds of financial products us the Libor rate as a benchmark rate for their pricing. Manipulating it even a tiny fraction hence has potentially huge ramifications.

As always in banking you have to pay attention. Prior to 2008, in the boom years, Barclays would very occasionally over-reported the rate at which they expected to be able to borrow, so it would push up the profits of their trading division. After 2008 Barclays under-reported the rate at which they expected to be able to borrow because it could have caused them to collapse.

After 2008 banks stopped lending to one another and Libor rates became a little esoteric, it was “the rate at which banks did not lend to each other.” In this period risk was mispriced but with the purpose of helping Barclays and the whole global financial system survive. This I feel is much more acceptable, and even regulatory forbearance of this fraud may be worthwhile given how damaging financial crises are.

What occurred before 2008 however was just awful. But what has to be clear is that this isn’t down to individuals, when you have simultaneous actions across a system you should blame the system.  But before 2008 it was out and out fraud and there should be criminal proceedings. After all, we live in a country where you can go to jail for stealing £3.50 worth of water.

In both cases a transfer was involved because risk was being mispriced, but after 2008 there was some public policy justification for doing so. Bob Diamond appears to be using this justification to defend the earlier practices and that I am unimpressed by.

This isn’t a case of bad apples – they were all doing it. The banking culture and system is broken and recruits for and promotes slightly psychopathic tendencies, we shouldn’t act surprised. But angry, I think acting angry is justified.

Filed under: Economics, Society